The following is a descriptive list of some of the more salient cross-border tax issues that could be faced by a technology client contemplating the initiation or expansion of foreign operations. Needless to say, the list is by no means exhaustive.

I. Beginning a Business Abroad

Significantly different tax consequences result depending on whether initial entry abroad is through simple agency (either independent or dependent) relationships, licensing agreements, joint ventures or strategic alliances, or independent or controlled distributors. If a foreign jurisdiction entity is desired, a broad range of choices with varying tax implications are available, such as a corporation, partnership, limited liability company, joint venture, or branch. Use of a partnership, limited liability company, joint venture, or branch, generally permits the flow-through to the interest holder or holders of income, gain, deductions, and credits, including any start-up losses to offset U.S. taxable income. (However, certain foreign losses incurred by a branch of a U.S. corporation may be "recaptured" as income subject to U.S. tax when the branch is incorporated.) A limited liability company normally provides the additional non-tax benefit of limited legal liability. Use of a foreign corporation generally provides deferral of U.S. tax on foreign source income until the income is repatriated. However, deferral is not permitted for certain types of income, including investment income and certain income from tax haven operations, earned by what is known as a U.S. "controlled foreign corporation." See the discussion below under Subpart F -- Controlled Foreign Corporation Regime.

II. Transfers of Intangible Rights Abroad

When a U.S. technology company begins operations abroad, normally the company - often without full awareness - will transfer significant intangible property rights abroad to facilitate the new business operations. These transfers have important - and often unexpected - U.S. tax implications. Generally, when a U.S. person transfers intangible property or rights therein abroad in what would otherwise be a nontaxable transaction if made in a strictly domestic context, tax consequences will occur. In some cases, an immediate tax is imposed on the inherent appreciation of the transferred asset. More typically - and potentially more burdensome - the transfer of intangible property or rights therein will subject the transferor to annual liability for tax on the stream of income generated abroad by the transferred property or rights. With proper planning - including identification of all intangible rights that could be considered transferred, documentation of rights transferred and retained, and consideration of cost sharing arrangements in lieu of transfers - the U.S. tax impact of intangible rights transfers can be minimized.

III. Transfer Pricing

The IRS has authority to reallocate taxable income to any U.S. taxpayer to reflect arm's length results from transactions with foreign related parties and to impose penalties of up to 40 percent on any taxpayer that underreports income from such transactions if it has not documented in advance the economic basis for the price charged. Transactions subject to these rules include the licensing of intangible property rights and the provision of services (including certain administrative services) by U.S. taxpayers to foreign affiliates, and sales transactions between U.S. taxpayers and foreign affiliates. Careful advance planning to identify potential related party transactions, to price them in accordance with arm's length principles and to document, at the time of the transaction, the economic basis for the reported prices is important to avoid exposure to significant penalties.

IV. Subpart F - Controlled Foreign Corporation Regime

Although generally the income earned by a foreign corporation is not subject to U.S. tax until it is repatriated to the United States, certain types of income earned by U.S. owned foreign corporations are subject to current U.S. taxation. The special feature of the "subpart F regime" - named after the location of the relevant statutory rules within the Internal Revenue Code - is the current inclusion of earnings in income of the U.S. shareholders in the year earned even if the earnings and profits are not distributed to the U.S. shareholders in that year.

A foreign corporation that is owned more than 50 percent by vote or value by U.S. shareholders that individually own at least 10 percent of the corporation either directly, indirectly (i.e., through ownership in an intermediary corporation or partnership), or constructively (i.e., through special rules that attribute stock owned by related parties to the shareholder) is a controlled foreign corporation ("CFC"). Generally, current U.S. taxation is imposed on two types of income earned by a CFC: passive or investment type income and income from so-called "tax haven" operations. Such income from "tax haven" operations generally consists of income derived from transactions between related foreign companies where a portion of the income is shifted from a party in a high-tax foreign jurisdiction to a related party located in a low-tax foreign jurisdiction. A U.S. shareholder of a CFC also is subject to current tax on the remainder of the CFC's earnings if the CFC invests those earnings in certain U.S. investments (e.g., certain stock and debt of U.S. issuers and U.S. rights in certain intangible property).

V. Foreign Tax Credit Regime

The United States imposes its tax on the worldwide income of U.S. taxpayers. Other countries tax at least the income considered to be earned within their borders, i.e., on a territorial basis. U.S. tax law permits the crediting on a dollar-for-dollar basis of foreign income taxes paid by a taxpayer against the taxpayer's U.S. tax liability - but only to the extent that such U.S. tax liability is attributable to foreign source income. (E.g., a taxpayer that has an effective U.S. tax rate of 35 percent and earns $300 of worldwide income, $100 of which is foreign source income, may reduce its U.S. tax liability by no more than $35 - the U.S. tax of $105 on the $300 of worldwide income multiplied by the taxpayer's 1:3 ratio of foreign source income to worldwide income - even if it pays $50 in foreign income taxes.) This limit generally places a premium on maximizing the amount of income that is treated as "foreign source" income (as well as minimizing the amount of deductible expenses allocable to foreign source income).

A second restriction on the availability of the foreign tax credit is that a taxpayer's foreign source income is divided into separate "baskets" based upon the nature of such income. Foreign income taxes imposed on the income in any given "basket" may not be credited against U.S. income taxes in respect of income in other baskets. Thus, taxpayers that pay foreign taxes on income from one basket at rates in excess of their effective U.S. tax rate may not cross-credit those taxes against U.S. taxes on income in a second basket that is subject to a low foreign tax rate. Without advance planning, therefore, taxpayers may lose the full tax benefit from excess foreign taxes paid on income from one basket even though their overall effective foreign tax rate is no higher than their overall effective U.S. tax rate.